USD/CHF Forecast: Approaching Key Long-Term Support Amid Dollar Weakness

The USD/CHF pair has been under consistent downward pressure as the U.S. dollar struggles amid softening Treasury yields and expectations of a more accommodative stance from the Federal Reserve. U.S. data revealed that core CPI increased by 0.3% in August, exceeding market expectations of 0.2%, which provided support for the U.S. dollar. Despite this data, the overall trend for USD/CHF remains downward. Meanwhile, the Swiss franc, known for its safe-haven status, continues to benefit from global economic uncertainties, reinforcing its strength against the dollar. While the Swiss National Bank (SNB) may consider policy adjustments in response to domestic economic conditions, the overall momentum for USD/CHF remains bearish, with the potential for further declines if key support levels are breached.

Swiss Franc Gains Momentum as US Dollar Weakens on Dovish Fed Expectations

USD/CHF continues to weaken as the US dollar remains under pressure, with US Treasury yields continuing to decline. The decline in U.S. yields signals investor expectation of a softer monetary policy from the Federal Reserve (Fed). This weakening of the U.S. Dollar (USD) continues to place downward pressure on USD/CHF.

Despite the lower reading in the headline inflation figure for the US, core inflation showed a slight uptick on a monthly basis. This unexpected increase caught markets off guard, as many were anticipating a further decline in inflation, potentially paving the way for a 50 basis point rate cut from the U.S. Federal Reserve and its Federal Open Market Committee (FOMC) in the coming week. The labor market’s recent performance, which has cast doubt on the need for an aggressive 50-basis point cut, adds complexity to this situation. Any unexpected dovish signals from the Fed could weaken the USD further. This scenario would likely push the USD/CHF pair lower, especially as the Swiss Franc (CHF) tends to strengthen when global economic uncertainty increases.

On the other hand, developments in Switzerland suggest a potential easing of monetary policy by the SNB. Inflation in Switzerland has dropped to a five-month low, fueling speculation about another rate cut by the SNB. While the Fed’s potential dovish stance may weaken the USD, a rate cut from the SNB could limit CHF gains, possibly stabilizing the USD/CHF exchange rate. The chart below illustrates the long-term inflation trend in Switzerland, showing that inflation has been on a general downward trajectory over the long term. Inflation spiked following the COVID-19 pandemic, but by 2023 had decreased to 2.13%. This downward trend in inflation could further reinforce expectations of monetary easing by the SNB, adding downward pressure on the Swiss franc if such measures are implemented.

The SNB recently lowered its policy rate by 25 basis points to 1.25% in June 2024, a move that aligned with market expectations due to falling inflation and the strong performance of the Swiss franc. There is speculation that further rate cuts may follow, depending on how inflation trends develop in the coming months. The SNB expects the economy to grow modestly, with GDP forecasted to rise by 1% in 2024 and 1.5% in 2025, alongside a slight increase in unemployment and stable production capacity. Prior to the rate cut, the Swiss franc had reached its strongest levels in three months against the US dollar and four months against the euro, as political uncertainty in France and the growing influence of far-right parties in the European Parliament elections increased demand for the franc as a safe-haven currency.

The decline in Switzerland’s foreign currency reserves suggests that the SNB may have limited room for further intervention in the currency markets, which could allow the CHF to strengthen naturally. A continued drop in reserves might indicate that the SNB is less willing or able to weaken the franc, potentially paving the way for CHF appreciation. If the SNB scales back its interventions, the franc could gain momentum, especially as the U.S. dollar faces pressure from the Fed’s dovish stance. In this scenario, the CHF is likely to strengthen, pushing USD/CHF lower.

The strength of the Swiss franc is evident in the chart below, which shows the percentage change in price for major Swiss pairs during the 21st century. It is observed that the Swiss franc has outperformed major currencies, with USD/CHF down by 46.70%, EUR/CHF down by 41.73%, and GBP/CHF down by 56.80%. These figures indicate a strong Swiss franc and a bearish trend for these pairs, reflecting CHF’s continued strength.

Long-Term Bearish Trend in USD/CHF and Key Historical Drops

The long-term trend for USD/CHF remains strongly bearish, as seen in the quarterly chart below. The chart highlights the continuation of strong bearish pressure on USD/CHF, marked by green arrows. The first significant drop is observed from 1970 to 1978, driven by a combination of geopolitical and economic factors. The collapse of the Bretton Woods system in 1971, which ended the U.S. dollar’s convertibility to gold, marked a critical turning point. This shift led to a period of floating exchange rates and a loss of confidence in the U.S. dollar.

Additionally, the U.S. experienced high inflation and economic instability during the 1970s, particularly driven by the 1973 oil crisis, which weakened the dollar. On the other hand, Switzerland’s economy remained stable, with low inflation and a strong financial sector, making the Swiss franc a preferred safe-haven currency. These factors contributed to the sharp decline in USD/CHF during this period.

The second major historical drop is observed from 1985 to 1987 which was largely driven by the coordinated efforts of major economies to weaken the U.S. dollar, known as the Plaza Accord of 1985. This agreement involved the U.S., Japan, West Germany, France, and the U.K., aiming to reduce the U.S. trade deficit by depreciating the dollar. As the U.S. dollar weakened globally, the Swiss franc, viewed as a stable and safe-haven currency, appreciated against the dollar. Additionally, concerns over the U.S. fiscal deficit and rising protectionism contributed to a loss of confidence in the dollar, leading to further declines in the USD/CHF exchange rate during this period.

The third major drop in USD/CHF occurred from 2001 to 2011, driven by the prolonged weakness of the U.S. dollar and the Swiss franc’s status as a safe-haven currency. After the 2001 dot-com bubble burst and the 9/11 attacks, the U.S. economy faced significant challenges, leading to low interest rates and a weaker dollar. The global financial crisis of 2008 exacerbated the situation, as investors flocked to the Swiss franc for its perceived stability during periods of uncertainty. Furthermore, U.S. monetary policy during this time, including aggressive quantitative easing programs, further devalued the dollar. In contrast, Switzerland maintained low inflation and a stable economy, contributing to the USD/CHF decline throughout the decade.

However, after the 2011 rebound, the USD/CHF market has been consolidating within a tight range for 13 years, with this consolidation producing bearish price action. This consolidation lies between $1.02 and $0.83. These 13 years of consolidation indicate that a break below this prolonged price range could potentially trigger another strong decline in the USD/CHF market.

A Possible Breakdown From 13 Years Consolidation Pattern

To further understand the 13 years of consolidation in USD/CHF, the quarterly chart is zoomed into the monthly chart, which clearly shows this consolidation. It is observed on the monthly chart that the price is under pressure. When prices rebound from the 13-year support, each rebound is capped by the resistance line, increasing the selling pressure. Additionally, the price is trading below the cross of the 50 and 100 Simple Moving Averages, indicating a strong bearish trend in the USD/CHF market. The recent decline began after the price hit the resistance of the 40 SMA and is now challenging the long-term support line. A break below this support line could trigger a strong and rapid downside move.

As the price approaches this long-term support, a potential rebound may be triggered, but it is likely to be capped by the resistance due to the strong bearish price development. As long as the price remains below $1.02, the long-term bearish pressure is likely to persist.

Final Thoughts

In conclusion, the USD/CHF pair continues to face significant downward pressure, driven by the weakening U.S. dollar amidst softening Treasury yields and expectations of a more accommodative Federal Reserve policy. The Swiss franc, benefiting from its safe-haven status, remains strong in times of global uncertainty, further intensifying the bearish outlook for USD/CHF. With the pair approaching long-term support levels, the potential for a major decline looms, particularly if the U.S. dollar remains under pressure. While a brief rebound may occur, strong resistance levels are likely to cap any upward movement, maintaining the long-term bearish momentum in the USD/CHF market. A break below $0.83 may trigger a major decline in USD/CHF.